Shares in the major banks dominated the top 10 fallers in the FTSE 100, led by Barclays, which ended 6% lower at 301p. The falls wiped out any lingering hopes that a new government would be able to point to gains on the taxpayers' stakes in Lloyds Banking Group and Royal Bank of Scotland, which plunged through their break-even levels.

The shares fell after Moody's ratings agency warned that Britain's banks were "vulnerable" and could take a hit to their profitability if the country's sovereign debt rating is downgraded.

In an assessment of the crisis gripping Greece and the eurozone, Moody's warned that banks in the UK and Ireland as well as those inPortugal, Spain and Italy all faced challenges if the countries suffered the same fate as Greece in being downgraded by the credit-rating agencies.

The warning by Moody's came as analysts at the French bank BNP Paribas calculated that one of the measures they use to measure risk of defaults had reached "unprecedented" levels, topping those registered in the days after Lehman Brothers collapsed in September 2008.

"The market is implying that the financial system is backed by the sovereigns," said Rajeev Shah, credit strategist at BNP Paribas. "A lot of the risk has moved from the financial system to the sovereigns but if contagion keeps spreading it effectively moves back to the financial system."